Question

Last week, Onboard Co. has announced that the next two annual dividends will be in the amount of $2.13 and $3.74, respectively. After that, the dividends will increase by 2.01 percent annually. The required return on this stock is 11.38 percent. What is the current price per share? (Hint: draw this out on a timeline.)

Answer 1

Step-1, Dividend for the next 2 years

Dividend in Year 1 (D1) = $2.01 per share

Dividend in Year 2 (D2) = $3.74 per share

Step-2, The Price of the stock in year 2 (P2)

Dividend Growth Rate after 2 years (g) = 2.01% per year

Required Rate of Return (Ke) = 11.38%

Therefore, the Share Price in year 2(P2) = D2(1 + g) / (Ke – g)

= $3.74(1 + 0.0201) / (0.1138 – 0.0201)

= $3.8152 / .0937

= $40.72 per share

Step-3, Current Price per share

As per Dividend Discount Model, The Current Price per share is the aggregate of the Present Value of the future dividend payments and the present value the share price in year 2

Year	Cash flow ($)	Present Value factor at 11.38%	Present Value of cash flows ($)
1	2.13	0.89783	1.91
2	3.74	0.80609	3.02
2	40.72	0.80609	32.82
TOTAL			$37.75

“Therefore, the current price per share will be $37.75 per share”

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.